UPSC Prelims 2021 Q7: Indian Economy – External Sector & Balance Of Payments
- (a) 1, 2 and 3
- (b) 3 only
- (c) 2 and 4
- (d) 1 and 4
Answer: (a) 1, 2 and 3
Explanation
Foreign Direct Investment (FDI): What Counts?
| Instrument | Is it FDI? | Rationale |
|---|---|---|
| 1. Foreign Currency Convertible Bonds (FCCBs) | YES | FCCBs are foreign-currency debt that CONVERT into equity of the Indian company - counted as FDI once converted (or when carrying option). |
| 2. Foreign Institutional Investment (FII/FPI) | YES with conditions | FPI holding <10% in a listed company is FPI. Holding >=10% by a single investor gets reclassified as FDI (Sept 2013 SEBI rule). |
| 3. Global Depository Receipts (GDRs) | YES | GDRs represent underlying Indian company shares held by a foreign depository bank. Since they represent equity ownership, they are FDI. |
| 4. Non-Resident External (NRE) Deposits | NO | NRE deposits are bank deposits by NRIs - foreign portfolio inflows and part of external debt, not FDI (no ownership of Indian company). |
FDI includes: FCCBs, FII (>=10%), and GDRs (1, 2 and 3). NRE deposits are NOT FDI.
Answer: (a) 1,2 and3.
Why each option is right or wrong
- (a) CORRECT. Items 1, 2 and 3 (FCCBs, FII with conditions, GDRs) all count as FDI. Item 4 (NRE deposits) is a bank liability, not an equity/ownership investment.
- (b) Incorrect. FCCBs and conditional FII also count as FDI, not just GDRs.
- (c) Incorrect. NRE deposits are NOT FDI - they are bank deposits by NRIs.
- (d) Incorrect. NRE deposits are external debt, not FDI.
Key point
FDI = equity/ownership stake giving lasting interest and control. FCCBs (convertible to equity), FII >=10% (reclassified as FDI), GDRs (represent shares) all count. NRE deposits = bank deposits by NRIs, NOT FDI (they are external debt).
Remember
FDI includes Foreign Currency Convertible Bonds (FCCBs, item 1), Foreign Institutional Investment with 10%+ threshold (item 2), and Global Depository Receipts (GDRs, item 3). NRE deposits (item 4) are bank deposits by NRIs and count as external debt, not FDI. Answer: 1, 2 and 3.
Common mistakes
- Confusing FDI with all foreign inflows. FDI needs an EQUITY/OWNERSHIP stake giving lasting interest (usually 10%+ threshold).
- Assuming all bond types are debt. FCCBs and GDRs have equity conversion features that make them FDI.
- Forgetting the 10% rule: FPI holding <10% = FPI; >=10% = FDI (SEBI 2013 rule).
Exam tip
FDI vs FPI vs External debt: FDI = ownership + control (equity, FCCBs, GDRs). FPI = <10% holding for financial return. External debt = ECBs, NRI deposits (NRE/NRO/FCNR), FCCBs pre-conversion. The 10% threshold is the FPI-FDI dividing line.
Sources
- RBI Master Direction - Foreign Investment in India
- Consolidated FDI Policy, DPIIT, Ministry of Commerce